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What Are Commodities
Commodities trading has been an essential part of human history since the days of exchanging spices and cowry shells. It is widely believed that commodities trading began in Asia hundreds of years ago. In today’s financial markets, commodities are mainly traded in two forms: cash settlement and forward settlement. In cash settlement, the clearance date is in the near future, whereas, in forward settlement, the clearance date is way further in the future and prices usually have wider spreads.
There are different types of commodities traded: Energies such as oil and natural gas; Precious Metals such as gold and silver; Agricultural Products such as coffee, wheat and sugar; and Livestock and Meat such as pork bellies and feeder cattle.
The most popular way to trade commodities is through futures contracts where there is an agreement to buy or sell a particular amount of the underlying commodity for a specific price at a later date. Futures exchanges standardize the minimum quality and quantity of a commodity to be traded. For instance, at the Chicago Board of Trade, one standard wheat contract represents 5000 bushels.
There are two types of traders in the commodity futures market: buyers and producers, as well as speculators. Buyers and producers use the futures market as a way of hedging against changes in prices, and this group of traders actually make or take delivery of the tangible commodity when the futures contract expires. For instance, a sugarcane farmer may wish to hedge against future price losses before harvesting. The farmer will sell sugar futures contracts during planting season, thus guaranteeing a pre-set price when the crop is harvested. The other group, speculators, seek to benefit from the price changes of futures contracts. They will close their contracts before the due date and will never make or take deliveries.
Commodities are a popular tradable asset class on our platforms. We offer commodity spread bets and CFDs on both cash and forward commodities such as gold, silver, Brent and WTI Crude oil.
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